As use of blockchain technology increases in the UAE, Nadim Bardawil of BSA Ahmad Bin Hezeem & Associates LLP looks at how it is being used in the Emirates and the legal questions it is raising.
The Middle East continues to be a base for businesses which want to gear towards digitalisation and achieve results using cutting edge technology. As a result, in order to remain competitive and maintain growth, many companies are beginning to let go of their traditional operating models and are replacing them with new, improved ones which maintain security. One particular trend which is emerging is blockchain technology, a technology which integrates a shared database with smart contracts in order to reduce costs and speed transactions.
What is blockchain?
Blockchain is a transparent and secure storage unit that operates without a central control body. It is a database that contains the history of all information exchanged and transmitted between its users since its creation. This information is integrated into 'blocks' and can be shared by its users without the need for intermediaries.
Each block contains information stored on and accessed by unrelated computers or servers around the world. These then form a ledger of all the transactions involving the information and these blocks are grouped together in a chain to which new information is added.
Blockchain is considered to be secure and even unhackable for two major reasons - the high level of computing power required to find a vulnerability in the system and the blockchain's lack of complexity.
While it is often used as a decentralised public ledger (for example with bitcoin and other crypto-currencies), it can also be used as a private intranet system where only authorised participants can access the information and network, or add blocks to the chain.
Blockchain Integration in the UAE
The UAE has become a leader in integrating blockchain technology and there have been various ventures launched in the Emirates by public and private institutions.
For example, Emirates Islamic is currently planning to integrate blockchain technology into cheques and will be the first Islamic bank to do this.
In order to help prevent fraud, they have taken the initiative to enhance security and banking transaction protection.
They plan to issue new cheque books which have a combination of Quick Response (QR) codes and blockchain technology. In addition, each cheque will be registered in order to validate the authenticity of the cheque the moment it is issued.
Meanwhile, the Abu Dhabi Securities Exchange (ADX) is another UAE institution which has announced plans for developments in this area, in the form of an e-voting platform which will be based on blockchain technology. ADX aims to use blockchain to allow annual general meetings to be conducted faster and with less effort while also ensuring secure voting and access to confidential documents.
In addition, in Dubai, Smart Dubai has been launched to help the city use innovative technology to improve the quality of life. One of its goals is to use blockchain technology in both public and private business transactions to increase efficiency.
The Department of Economic Development has already begun testing the use of blockchain when licensing companies in the Emirate and the Department of Naturalisation and Residency is looking to use this technology to speed up immigration procedures at Dubai airports.
While these examples are a positive start, blockchain also has the potential to be used in many other industries to increase efficiency and security.
For example, IP registration (e.g. of trademarks, patents, copyrights and designs) can be greatly improved by integrating blockchain technology into the registration process at the trademark office level in individual jurisdictions. By using an interconnected smart ledger, trademark offices can ensure more accurate record keeping and improve usage registration. IP owners can also securely register where and when they use their IP, aiding protecting against counterfeit products and unlawful usage.
There have also been a number of attempts to use blockchain to assist in land registrations. As using a secure, robust recording system like blockchain can ensure the registration of title deeds is traceable and help reduce incidents of fraud in property transactions.
Recently the Dubai Land Department announced it was going to implement blockchain technology to register real estate transactions.
However, as with any new technology, there are always integration and application obstacles, and with blockchain, these need to be carefully considered.
One of blockchain's fundamental innovations is the ability to transact and exchange information anonymously. Most currency related transactions do not require the parties to know each other, meet face-to-face or directly interact in order to exchange value. However, legislators can still face difficulties in this respect on the application of their laws and regulations. For example, it is necessary to follow rules on 'know your customer' and anti-money laundering when processing financial transactions. Over time, blockchains and other new payment networks will not be exempt from these legal requirements, and some countries have already gone as far as banning or severely restricting crypto-currencies because of the lack of regulations and uncertainty.
Blockchain also raises challenges on data privacy as data is stored on each block. Some laws require corporations to permanently remove data which belongs to individuals once a request has been made. This creates problems for a blockchain platform, as by nature, they do not allow data to be easily modified or deleted, but instead merely updated in subsequent blocks. As data protection legislation continues to evolve, blockchain models will need to evolve in parallel and find solutions to these privacy issues.
In theory a decentralised blockchain system can be accessed from any computer around the world. Therefore, there is a question of which jurisdiction governs any dispute which arise in a blockchain transaction. In practice, regardless of the transaction mechanism used in a contract, or the location of that contract, a suit can be brought based on the jurisdiction detailed in the contract. However, with blockchain, identifying the proper forum for a dispute is a complicated matter. Therefore, it is necessary to exercise caution when creating a blockchain to ensure users' rights are clearly protected and a forum for disputes is pre-selected when users begin to transact using the blockchain.
The issue of liability is also raised with a decentralised blockchain model, if and when individual transactions are not properly registered. If there is any breach of privacy or security, it is difficult to pinpoint who is liable for these actions. Liability, is still an issue in a private blockchain model, as there is potential for a malfunctioning blockchain. If this happens, the company hosting and or managing the blockchain may have to bear the brunt of the blame. In either situation, it is vital liability questions are considered and answered in order to allow users and companies to adequately measure risks of using blockchain. Although blockchain has clear untapped potential, there are still issues with the day to day application of this technology. Therefore, both governments and businesses should work together to try to highlight these and jointly find innovative ways to overcome them, as the fast-paced nature of today's technology requires greater cooperation between all relevant stakeholders.
Originally published in the December 2017 edition of Emirates Law Magazine.
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